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As I watch political
events in Hungary, I cannot help but think Hungary is on a path towards
hyperinflation.
Please consider Der Spiegel report 'Democracy Is Being Trampled
On in Hungary' and see if you agree.
The
European Commission on Tuesday announced that it was combing through both the
new constitution, which took effect on Jan. 1, and a new law pertaining to
Hungary's central bank, the Magyar Nemzeti Bank
(MNB), to determine if they adhere to European Union treaties. Furthermore,
the Commission said on Tuesday that the EU and the International Monetary
Fund (IMF) have not yet decided whether to resume negotiations over
much-needed financial assistance for Budapest.
It didn't take long for markets to react. Yields on 10-year Hungarian bonds
spiked to 10.7 percent on Wednesday, continuing a sharp rise since the talks
over a €20 billion ($26 billion) EU/IMF aid package for Hungary
collapsed in December. The country's currency, the forint, plunged to an
all-time low against the euro on Wednesday morning. Both Standard &
Poor's and Moody's slashed Hungary's credit rating to junk status in the
weeks before Christmas. Hungary needs to refinance debt worth €4.8
billion in the coming months.
The aid talks were broken off due to concerns about new laws regulating the
central bank, pushed through by Orban's
center-right Fidesz party, which controls
two-thirds of the seats in parliament. Of particular concern are provisions
which allow the government to appoint the bank's vice presidents, thus infringing
on MNB's independence. Furthermore, the law increases the number of vice
presidents from two to three, allowing Orban to
appoint one immediately.
In addition, the committee which sets monetary policy has been expanded, with
new members to be appointed by the Fidesz-run
government.
Weakens Legal Protections
Potentially more damaging, however, is the fact that the new constitution
grants parliament the right to merge the central bank with a financial
oversight authority, the head of which would then be appointed by the
government. Were the Orban government to take
advantage of the provision, it would mean that the supposedly independent
central bank president would have to answer to an Orban-appointed
superior.
Hungarian Protests
over Constitutional Changes
The Spiegel headline "Democracy Is Being Trampled On in Hungary"
is accurate. For another opinion please consider Hungary set for protests over
constitution.
Supporters of the opposition green-liberal party LMP protest in Budapest
on 23 December. Photograph: Zsolt Szigetvary/EPA
Thousands of people were expected to protest in Budapest on Monday night
after the government made sweeping changes to the Hungarian constitution that
opposition figures say are an attack on democracy.
The demonstration near the city's opera house comes amid rising anger with
the ruling Fidesz party, which critics –
including the US secretary of state, Hillary Clinton – fear is eroding
individual liberties and media freedom while undermining the independence of
the judiciary and other state institutions.
Although Fidesz won enough votes in the last
elections to command a super-majority, polls suggest its support has plunged
over the last year and a half. Peter Kreko,
research director at the Budapest-based thinktank,
the Political Capital Institute, said: "In May 2010, 45% of voters chose
Fidesz. But polls now show just 20% of people still
support the party. There is a huge disillusionment with politics in Hungary
now."
Hungary Currency Hits
Record Low, Bond Auctions Cancelled
Bloomberg reports Forint Hits Record Low as
Default Swaps Soar
The
forint fell to 321.1 against the European common currency at 5 p.m. in
Budapest. The previous record was 317.92 on Nov. 14. The cost of insuring
Hungarian bonds using credit- default swaps climbed to a record 708 basis points
from 650 yesterday, data provider CMA said.
Hungary, the EU’s most-indebted eastern member, received its second
sovereign-credit downgrade to junk last month when Standard &
Poor’s followed Moody’s Investors Service in taking the country
out of the investment-grade category on Dec. 21.
Hungary’s state debt management agency rejected all bids at a
government bond exchange auction today as the increase in yields rendered
“an extension of the maturity not worthwhile,” the agency said in
an e-mailed statement. The auction offered the chance for investors to swap
government securities due in 2013 for 10-year notes.
Hyperinflation a
Political Event
Hyperinflation is a complete loss of faith of currency.
Misguided souls preaching hyperinflation in the US for years on end have yet
to grasp the fact that hyperinflation is not really a monetary event as much
as a political event.
For a discussion, please see Hyperinflation Nonsense in
Multiple Places.
In the above link, I provide explanations of Weimar Germany, Argentina,
Zimbabwe, and numerous other countries showing the hyperinflation process is
political not monetary, and also reasons why hyperinflation in the US is is extremely unlikely.
In contrast to the US, Hungary, via political actions is now on path that can
lead to government takeovers of the printing presses and a loss of faith in
the Forint (Hungary's currency). If voters retake control before it's too
late or the government does not take over the printing presses (and
constitutional freedoms are restored), a meltdown may be avoided.
Unfortunately the political signs are not encouraging.
If I Only Had a Bank!?
As much as I despise the Fed, an independent Fed is better than having
government bureaucrats, President Obama, or public unions in California
determine monetary policy.
Please consider this scary video by Ellen Brown.
The idea that North Dakota, a small loosely-populated farm state is in good
shape only because it has a state bank is preposterous. Worse yet, Brown
takes that absurd position to the extreme, with a proposal to end the Fed and
put California politicians (state politicians in general) in charge of printing
money to support union causes.
Note that if Ellen Brown got here way, it would take a political event, not a
monetary one to change direction.
Should populist Ellen Brown get her way, I would have to rethink my US
hyperinflation position. Ellen Brown is another one of those who understands
various problems with the Fed, but proposes a solution that is worse, putting
state politicians in charge of printing presses.
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